Goldman’s forecast for stocks over the next 3 months isn’t pretty – and investors should expect ‘less pain but no gains’ next year

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Despite a parade of recession forecasts from Wall Street this year, Goldman Sachs strategists still believe a “soft landing” is likely.

But that doesn’t mean stock market investors should celebrate.

The equity research team at the 153-year-old investment bank, led by chief US equity strategist David Kostin, said this week they think the S&P 500 will fall about 10% to 3600 over the next three months as interest rates rise.

After that, Kostin and his team stated that the 2023 blue-chip index will end at 4000, about the same level it closed today.

Their argument is based on the idea that the Federal Reserve’s inflation battle will end by May next year, which will help boost stock prices from their lows even as global economic growth stagnates.

The Fed has raised interest rates six times this year to combat inflation not seen since the early 1980s. In October, the results of his work began to show as annual inflation, as measured by the consumer price index (CPI), fell to 7.7%, a significant drop from June’s peak of 9.1% .

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“Our economists expect it will become clear in early 2023 that inflation is slowing and that the Fed will reduce the size of the hikes and eventually stop tightening,” Kostin wrote in a research note Monday.

But at the same time, with a lack of corporate earnings growth ahead and company profit margins under pressure, Kostin and his team said they expect “less pain but no gains” for stocks in 2023.

And they warned that there is one major risk to their stock thesis flat-year: a recession.

“[A] flat return under our base housing and [a] major downside in a recession means investors should remain cautious,” they wrote.

A ‘separate risk’

Here are the facts. Some 98% of CEOs expect a recession within 18 months and 72% of economists surveyed by the National Association for Business Economics expect a recession within a year. Meanwhile, 75% of voters believe we’re already in a recession — and billionaires like Elon Musk agree.

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Despite this, Goldman Sachs believes the US economy is strong enough to weather the storm, even though analysts admit that a severe economic downturn “remains a clear risk”.

If a recession does come, Kostin and his team say corporate earnings will fall 11% next year. For the S&P 500, that would mean a drop to 3150 (-22%) at the bottom of the recession.

When is that low point? Kostin and his team did not make that prediction, but argued that when economic growth rates are at their worst, markets usually bottom out.

For example, they noted that during the 12 recessions since World War II, the S&P 500 “often” bottomed out within a few months of the cycle low of the ISM Manufacturing Index, which is a gauge of economic activity in the manufacturing sector. reaches. .

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Finally, Kostin and his team noted that there will be less interest in stocks next year due to a reduced number of corporate buybacks, as well as fewer stock purchases among private investors, which could hurt stock prices.

“Buybacks have been the largest and most consistent source of demand for stocks for more than 10 years, but demand will decline in 2023,” they wrote, predicting a 10% year-over-year decline in corporate buybacks.

Goldman also expects households to be net sellers of stocks next year for the first time since 2018, with estimated outflows of $100 billion.

This story was originally on Fortune.com

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